As filed with the Securities and Exchange Commission on May 17, 1999.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
STATE OF ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street
Suite 1000
Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 265-5600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
The number of shares outstanding of the registrant's classes of common
stock, as of April 30, 1999 was:
45,952,568 shares of Class A common stock; and
4,055,437 shares of Class B common stock.
1
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
PAGE NO
-------
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998.......................................5
Consolidated Statements of Operations for the
three months ended March 31, 1999
(unaudited) and 1998 (unaudited)........................................7
Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 1999
(unaudited) and 1998 (unaudited)........................................8
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 (unaudited)
and 1998 (unaudited)....................................................9
Notes to Interim Condensed Consolidated Financial
Statements..............................................................10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.............................................................36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................................36
Item 6. Exhibits and Reports on Form 8-K...........................................37
Other items are omitted as they are not applicable.
SIGNATURES................................................................................................38
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this quarterly report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1996 ("Securities Reform Act"). These statements may be
preceded by, followed by, or include the words "believes," "expects,"
"anticipates," or similar expressions. For those statements, the Company claims
protection of the safe-harbor for forward-looking statements contained in the
Securities Reform Act. Such forward-looking statements involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results, performance and achievements of the Company, or industry results, to
differ materially from future results, performance or achievements expressed or
implied by such statements. The reader is cautioned that important factors, such
as the following risks, uncertainties, and other factors, in addition to those
contained elsewhere in this document, could affect future results of the
Company, its long-distance telecommunication services, local access services,
Internet services and cable services and could cause those results to differ
materially from those expressed in the forward-looking statements:
- Material adverse changes in the economic conditions in the markets
served by the Company;
- The efficacy of the rules and regulations to be adopted by the Federal
Communications Commission ("FCC") and state public regulatory agencies
to implement the provisions of the 1996 Telecom Act; the outcome of
litigation relative thereto; and the impact of regulatory changes
relating to access reform;
- The Company's responses to competitive products, services and pricing,
including pricing pressures, technological developments, alternative
routing developments, and the ability to offer combined service
packages that include local, cable and Internet services; the extent
and pace at which different competitive environments develop for each
segment of the Company's business; the extent and duration for which
competitors from each segment of the telecommunications industry are
able to offer combined or full service packages prior to the Company
being able to do so; the degree to which the Company experiences
material competitive impacts to its traditional service offerings prior
to achieving adequate local service entry; and competitor responses to
the Company's products and services and overall market acceptance of
such products and services;
- The outcome of negotiations with Incumbent Local Exchange Carriers
("ILECs") and state regulatory arbitrations and approvals with respect
to interconnection agreements; and the ability to purchase unbundled
network elements or wholesale services from ILECs at a price sufficient
to permit the profitable offering of local exchange service at
competitive rates;
- Success and market acceptance for new initiatives, many of which are
untested; the level and timing of the growth and profitability of new
initiatives, particularly local access services, Internet (consumer and
business) services and wireless services; start-up costs associated
with entering new markets, including advertising and promotional
efforts; successful deployment of new systems and applications to
support new initiatives; and local conditions and obstacles;
- Uncertainties inherent in new business strategies, new product launches
and development plans, including local access services, Internet
services, wireless services, digital video services, cable modem
services, and transmission services;
- Rapid technological changes;
- Development and financing of telecommunication, local access, wireless,
Internet and cable networks and services;
- Future financial performance, including the availability, terms and
deployment of capital; the impact of regulatory and competitive
developments on capital outlays, and the ability to achieve cost
savings and realize productivity improvements;
3
- Availability of qualified personnel;
- Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
Alaska Public Utilities Commission ("APUC"), and adverse outcomes from
regulatory proceedings;
- The cost of the Company's Year 2000 compliance efforts;
- Uncertainties in federal military spending levels and military base
closures in markets in which the Company operates; and
- Other risks detailed from time to time in the Company's periodic
reports filed with the Securities and Exchange Commission.
These forward-looking statements (and such risks, uncertainties and other
factors) are made only as of the date of this report and the Company expressly
disclaims any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained in this document to reflect any
change in the Company's expectations with regard to those statements or any
other change in events, conditions or circumstances on which any such statement
is based. Readers are cautioned not to put undue reliance on such forward
looking statements.
4
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 1999 1998
- --------------------------------------------------------------------- ----------------- -----------------
(Amounts in thousands)
Current assets:
Cash and cash equivalents $ 6,169 12,008
----------------- -----------------
Receivables:
Trade 39,019 38,890
Income taxes 2,262 4,262
Other 379 412
----------------- -----------------
41,660 43,564
Less allowance for doubtful receivables 1,384 887
----------------- -----------------
Net receivables 40,276 42,677
Prepaid and other current assets 2,547 2,212
Deferred income taxes, net 1,978 1,947
Inventories 1,611 1,878
Notes receivable 628 650
----------------- -----------------
Total current assets 53,209 61,372
----------------- -----------------
Property and equipment in service, net 316,071 199,827
Construction in progress 4,654 119,395
----------------- -----------------
Net property and equipment 320,725 319,222
----------------- -----------------
Other assets:
Cable franchise agreements, net of amortization 194,017 195,308
Other intangible assets, net of amortization 45,065 45,391
Deferred loan and senior notes costs, net of amortization 9,577 9,877
Transponder deposit (note 5) 9,100 9,100
Notes receivable 1,522 1,432
Other assets, at cost, net of amortization 3,777 4,414
----------------- -----------------
Total other assets 263,058 265,522
----------------- -----------------
Total assets $ 636,992 646,116
================= =================
See accompanying notes to interim condensed consolidated financial statements.
5 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- --------------------------------------------------------------------------- --------------- --------------
(Amounts in thousands)
Current liabilities:
Current maturities of long-term debt (note 3) $ 1,836 1,799
Current maturities of obligations under capital leases 527 511
Accounts payable 26,736 27,550
Accrued interest 3,694 8,072
Accrued payroll and payroll related obligations 7,013 6,555
Accrued liabilities 3,662 3,197
Subscriber deposits and deferred revenues 5,983 5,300
--------------- --------------
Total current liabilities 49,451 52,984
Long-term debt, excluding current maturities (note 3) 354,338 349,858
Obligations under capital leases, including related party obligations,
excluding current maturities 1,536 1,675
Deferred income taxes, net of deferred income tax benefit 33,246 38,275
Other liabilities 3,229 3,317
--------------- --------------
Total liabilities 441,800 446,109
--------------- --------------
Stockholders' equity (note 6):
Common stock (no par):
Class A. Authorized 100,000,000 shares; issued and outstanding
45,950,745 and 45,895,415 shares at March 31, 1999 and December
31, 1998, respectively 172,746 172,708
Class B. Authorized 10,000,000 shares; issued and outstanding
4,055,290 and 4,060,620 shares at March 31, 1999 and
December 31, 1998, respectively; convertible on a
share-per-share basis intoClass A common stock 3,432 3,432
Less cost of 286,554 Class A common shares held in treasury at
March 31, 1999 and December 31, 1998 (1,607) (1,607)
Paid-in capital 5,725 5,609
Notes receivable issued upon stock option exercise (741) (637)
Retained earnings 15,637 20,502
--------------- --------------
Total stockholders' equity 195,192 200,007
--------------- --------------
Commitments and contingencies (notes 5 and 6)
Total liabilities and stockholders' equity $ 636,992 646,116
=============== ==============
See accompanying notes to interim condensed consolidated financial statements.
6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
1999 1998
-------------- --------------
(Amounts in thousands except per
share amounts)
Revenues (note 4) $ 61,338 58,152
Cost of sales and services 27,870 27,315
Selling, general and administrative 23,538 20,334
Depreciation and amortization 10,298 8,066
-------------- --------------
Operating income (loss) (368) 2,437
Interest expense, net 6,960 4,944
-------------- --------------
Net loss before income taxes and cumulative effect of a change
in accounting principle (7,328) (2,507)
Income tax benefit 2,807 891
-------------- --------------
Net loss before cumulative effect of a change in accounting
principle (4,521) (1,616)
Cumulative effect of a change in accounting principle, net of income tax
benefit of $245 344 ---
-------------- --------------
Net loss $ (4,865) (1,616)
============== ==============
Basic loss per common share:
Loss before cumulative effect of a change in accounting principle $ (0.10) (0.03)
Cumulative effect of a change in accounting principle --- ---
-------------- --------------
Net loss $ (0.10) (0.03)
============== ==============
Diluted loss per common share:
Loss before cumulative effect of a change in accounting principle $ (0.10) (0.03)
Cumulative effect of a change in accounting principle --- ---
-------------- --------------
Net loss $ (0.10) (0.03)
============== ==============
See accompanying notes to interim condensed consolidated financial statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Notes
Shares of Common Class A Class B Class A Receiv-
(Unaudited) Stock Common Common Shares Held Paid-in able Retained
(Amounts in thousands) Class A Class B Stock Stock in Treasury Capital Issued Earnings
---------------------------------------------------------------------------------------
Balances at December 31, 1997 45,279 4,063 $ 170,322 3,432 (1,039) 4,425 --- 27,299
Net loss --- --- --- --- --- --- --- (1,616)
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- --- --- 10 --- ---
Shares issued under stock option plan 56 --- 170 --- --- 80 --- ---
Stock offering issuance costs --- --- (15) --- --- --- --- ---
---------------------------------------------------------------------------------------
Balances at March 31, 1998 45,335 4,063 $ 170,477 3,432 (1,039) 4,515 --- 25,683
=======================================================================================
Balances at December 31, 1998 45,895 4,061 $ 172,708 3,432 (1,607) 5,609 (637) 20,502
Net loss --- --- --- --- --- --- --- (4,865)
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- --- --- 8 --- ---
Class B shares converted to Class A 6 (6) --- --- --- --- --- ---
Shares issued and issuable under stock
option plan --- --- --- --- --- 54 --- ---
Shares issued under officer stock option
agreements and notes issued upon
officer stock option exercise 50 --- 38 --- --- --- (104) ---
Warrants issued --- --- --- --- --- 54 --- ---
---------------------------------------------------------------------------------------
Balances at March 31, 1999 45,951 4,055 $ 172,746 3,432 (1,607) 5,725 (741) 15,637
=======================================================================================
See accompanying notes to interim condensed consolidated financial statements.
8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1999 1998
------------- -------------
(Amounts in thousands)
Cash flows from operating activities:
Net loss $ (4,865) (1,616)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization 10,298 8,066
Amortization charged to selling, general and administrative
430 115
Deferred income tax (benefit) expense (3,052) 1,969
Deferred compensation and compensatory stock options 172 168
Bad debt expense, net of write-offs 497 115
Write-off of unamortized start-up costs 589 ---
Warrants issued 54 ---
Other noncash income and expense items 20 (26)
Change in operating assets and liabilities (note 2) (3,956) (14,342)
-------------- --------------
Net cash provided (used) by operating activities 187 (5,551)
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment, including construction period
interest (9,882) (28,167)
Restricted cash investment --- 13,152
Purchases of other assets (391) (1,275)
Notes receivable issued (89) (30)
Payments received on notes receivable 15 95
-------------- --------------
Net cash used in investing activities (10,347) (16,225)
-------------- --------------
Cash flows from financing activities:
Long-term borrowings - bank debt and leases 4,884 24,027
Repayments of long-term borrowings and capital lease obligations (490) (443)
Stock offering issuance costs --- (15)
Payment of debt issuance costs (7) (1,078)
Note receivable issued upon stock option exercise (104) ---
Proceeds from common stock issuance 38 170
-------------- --------------
Net cash provided by financing activities 4,321 22,661
-------------- --------------
Net increase (decrease) in cash and cash equivalents (5,839) 885
Cash and cash equivalents at beginning of period 12,008 3,048
-------------- --------------
Cash and cash equivalents at end of period $ 6,169 3,933
============== ==============
See accompanying notes to interim condensed consolidated financial statements.
9
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) General
(a) Business
General Communication, Inc. ("GCI"), an Alaska corporation, was
incorporated in 1979. GCI and its direct and indirect
subsidiaries (collectively, the "Company") offer long-distance
telephone service between Anchorage, Fairbanks, Juneau, and
other communities in Alaska and the remaining United States and
foreign countries. Cable television services are offered
throughout Alaska and facilities-based competitive local access
services are offered in Anchorage, Alaska. The Company provides
services to certain common carriers terminating traffic in
Alaska, interstate and intrastate private line services,
Internet services, managed services to certain commercial
customers and sells and services dedicated communications
systems and related equipment. Private network point-to-point
data and voice transmission services between Alaska, Hawaii and
the western contiguous United States are offered and the
Company owns and leases capacity on two undersea fiber optic
cables used in the transmission of interstate private line,
switched message long-distance and Internet services between
Alaska and the remaining United States and foreign countries.
(b) Organization
The consolidated financial statements include the accounts of
GCI, its wholly-owned subsidiary GCI, Inc., GCI, Inc.'s
wholly-owned subsidiary GCI Holdings, Inc., GCI Holdings,
Inc.'s wholly-owned subsidiaries GCI Communication Corp., GCI
Communication Services, Inc. and GCI Cable, Inc., GCI
Communication Services, Inc.'s wholly-owned subsidiary GCI
Leasing Co., Inc., GCI Transport Company, Inc., GCI Transport
Company, Inc.'s wholly-owned subsidiaries GCI Fiber Co., Inc.
and Fiber Hold Company, Inc. and GCI Fiber Co., Inc.'s and
Fiber Hold Company, Inc.'s wholly owned partnership Alaska
United Fiber System Partnership.
(c) Net Loss Per Common Share
Shares used to calculate net loss per common share consist of
the following (amounts in thousands):
Three Months Ended
March 31,
1999 1998
----------- ---------
Weighted average common shares outstanding 49,636 49,190
Common equivalent shares outstanding --- ---
----------- ---------
49,636 49,190
=========== =========
Common equivalent shares outstanding of 493,000 and 862,000 are
anti-dilutive at March 31, 1999 and 1998, respectively, and are
not included in the diluted net loss per share calculation.
Weighted average shares associated with outstanding stock
options totaling 2,380,000 and 3,748,000 at March 31, 1999 and
1998, respectively, have been excluded from the diluted loss
per share calculations because the options' exercise price was
greater than the average market price of the common shares.
10 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(d) Cumulative Effect of a Change in Accounting Principle
In April 1998, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities". SOP 98-5
provides guidance on the financial reporting of start-up costs
and organization costs and requires costs of start-up
activities and organization costs to be expensed as incurred.
SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. Management of the Company
adopted SOP 98-5 in the first quarter of 1999 resulting in the
recognition of a one-time expense of $344,000 (net of income
tax benefit of $245,000) associated with the write-off of
unamortized start-up costs. Pro forma first quarter 1998 net
loss and net loss per common share approximate amounts
reflected in the accompanying interim condensed consolidated
financial statements.
(e) Reclassifications
Reclassifications have been made to the 1998 financial
statements to make them comparable with the 1999 presentation.
(f) Other
The accompanying unaudited interim condensed consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. The
interim condensed consolidated financial statements include the
consolidated accounts of General Communication, Inc. and its
wholly owned subsidiaries (collectively, the "Company") with
all significant intercompany transactions eliminated. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the
three-month period ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year
ended December 31, 1999. For further information, refer to the
financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended
December 31, 1998.
11 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of:
Three-month periods ended March 31, 1999 1998
------------- ------------
(Amounts in thousands)
Increase in receivables $ (96) (3,910)
Decrease in income tax receivable --- (2,861)
Increase in prepaid and other current assets (335) (373)
(Increase) decrease in inventory 267 (411)
Decrease in accounts payable (814) (3,443)
Increase (decrease) in accrued liabilities 465 (582)
Increase in accrued payroll and payroll related obligations 458 997
Decrease in accrued interest (4,378) (4,109)
Increase in deferred revenues 683 327
Increase (decrease) in other liabilities (206) 23
------------- ------------
$ (3,956) (14,342)
============= ============
No income taxes were paid and no income tax refunds were received
during the three-month periods ended March 31, 1999 and 1998.
Interest paid totaled $12,890,000 and $10,767,000 during the
three-month periods ended March 31, 1999 and 1998, respectively.
(3) Long-term Debt
On January 27, 1998, the Company, through Alaska United Fiber System
Partnership ("Alaska United"), closed a $75,000,000 project finance
facility ("Fiber Facility") to construct a fiber optic cable system
connecting Anchorage, Fairbanks, Valdez, Whittier, Juneau and Seattle
as further described in note 5. Borrowings under the Fiber Facility
totaled $66,108,000 at March 31, 1999. In April 1999, borrowings
under the Fiber Facility totaled $75,000,000, the maximum amount
available under the Fiber Facility agreement.
(4) Industry Segments Data
The Company's reportable segments are business units that offer
different products. The reportable segments are each managed
separately because they manage and offer distinct products with
different production and delivery processes.
The Company has four reportable segments as follows:
Long-distance services. A full range of common-carrier
long-distance services are offered to business, government, other
telecommunications companies and consumer customers, through its
networks of fiber optic cables, digital microwave, and fixed and
transportable satellite earth stations.
Cable services. The Company provides cable television services to
residential, commercial and government users in the State of
Alaska. The Company's cable systems serve 26 communities and
areas in Alaska, including the state's three largest urban areas,
Anchorage, Fairbanks and
12 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Juneau. Anchorage cable plant upgrades in 1998 enabled the
Company to offer digital cable television services and retail
cable modem service (through its Internet services segment) in
Anchorage, complementing its existing service offerings. The
Company plans to expand its product offerings as plant upgrades
are completed in other communities in Alaska.
Local access services. The Company introduced facilities based
competitive local exchange services in Anchorage in 1997. The
Company has announced plans to ultimately provide similar
competitive local exchange services in Alaska's other major
population centers, as access is allowed by the Alaska Public
Utilities Commission.
Internet services. The Company began offering wholesale and
retail Internet services in 1998. Deployment of the new undersea
fiber optic cable (see note 5) allows the Company to offer
enhanced services with high-bandwidth requirements.
Services provided by the Company that are included in the "Other"
segment in the tables that follow are managed services, product sales
and cellular telephone services. Included in the Other segment are
the results of insignificant business units described above which do
meet the quantitative thresholds for determining reportable segments.
None of these business units have ever met the quantitative
thresholds for determining reportable segments. Also included in the
Other segment are corporate related expenses, including marketing,
customer service, management information systems, accounting, legal
and regulatory, human resources and other general and administrative
expenses.
The Company evaluates performance and allocates resources based on
(1) earnings or loss from operations before depreciation,
amortization, net interest expense, income taxes and cumulative
effect of a change in accounting principle, and (2) operating income
or loss. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting
policies included in the Company's annual report on Form 10-K at
December 31, 1998. Intersegment sales are recorded at cost plus an
agreed upon intercompany profit.
All revenues are earned through sales of services and products within
the United States of America. All of the Company's long-lived assets
are located within the United States of America.
Summarized financial information concerning the Company's reportable
segments follows for the quarters ended March 31, 1999 and 1998
(amounts in thousands):
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
------------------------------------------------------------------------
1999
----
Revenues:
Intersegment $ 1,902 613 660 --- --- 3,175
External 37,542 15,062 3,714 1,969 3,051 61,338
------------------------------------------------------------------------
Total revenues 39,444 15,675 4,374 1,969 3,051 64,513
========================================================================
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
------------------------------------------------------------------------
Earnings (loss) from operations
before depreciation,
amortization, net interest expense,
income taxes and cumulative effect
of a change in accounting principle $12,859 8,673 (230) (1,782) (9,339) 10,181
========================================================================
Operating income (loss) $ 9,288 4,282 (1,040) (2,034) (10,613) (117)
========================================================================
1998
----
Revenues:
Intersegment $ --- 317 --- --- --- 317
External 38,651 14,201 1,013 903 3,384 58,152
------------------------------------------------------------------------
Total revenues $38,651 14,518 1,013 903 3,384 58,469
========================================================================
Earnings (loss) from operations
before depreciation,
amortization, net interest
expense and income taxes $14,290 7,136 (1,361) 377 (9,936) 10,506
========================================================================
Operating income (loss) $12,117 3,512 (2,428) 242 (11,003) 2,440
========================================================================
A reconciliation of total segment revenues to consolidated revenues
follows:
Quarters ended March 31, 1999 1998
------------- --------------
Total segment revenues $ 64,513 58,469
Less intersegment revenues eliminated in consolidation (3,175) (317)
------------- --------------
Consolidated revenues $ 61,338 58,152
============= ==============
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A reconciliation of total segment earnings from operations before
depreciation, amortization, net interest expense, income taxes and
cumulative effect of a change in accounting principle to consolidated
net loss before income taxes and cumulative change in accounting
principle follows:
Quarters ended March 31, 1999 1998
------------- --------------
Total segment earnings from operations before depreciation,
amortization, net interest expense, income taxes and
cumulative effect of a change in accounting principle $ 10,181 10,506
Less intersegment contribution eliminated in consolidation (251) (3)
------------- --------------
Consolidated earnings from operations before
depreciation, amortization, net interest expense,
income taxes and cumulative effect of a change in
accounting principle 9,930 10,503
Depreciation and amortization 10,298 8,066
------------- --------------
Consolidated operating income (loss) (368) 2,437
Interest expense, net (6,960) (4,944)
------------- --------------
Consolidated net loss before income taxes and
cumulative effect of a change in accounting
principle $ (7,328) (2,507)
============= ==============
A reconciliation of total segment operating income (loss) to
consolidated net loss before income taxes and cumulative effect of a
change in accounting principle follows:
Quarters ended March 31, 1999 1998
------------- --------------
Total segment operating income (loss) $ (117) 2,440
Less intersegment contribution eliminated in consolidation (251) (3)
------------- --------------
Consolidated operating income (loss) (368) 2,437
Interest expense, net (6,960) (4,944)
------------- --------------
Consolidated net loss before income taxes and
cumulative effect of a change in accounting
principle $ (7,328) (2,507)
============= ==============
(5) Commitments and Contingencies
Deferred Compensation Plan
The Company's non-qualified, unfunded deferred compensation plan
provides a means by which certain employees may elect to defer
receipt of designated percentages or amounts of their compensation
and provides a means for certain other deferrals of compensation. The
Company may, at its discretion, contribute matching deferrals equal
to the rate of matching selected by the Company. Participants
immediately vest in all elective deferrals and all income and gain
attributable thereto. Matching contributions and all income and gain
attributable thereto vest over a six-year period. Participants may
elect to be paid in either a single lump sum payment or annual
installments over a period not to exceed 10 years. Vested balances
are payable upon termination
15 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
of employment, unforeseen emergencies, death and total disability.
Participants are general creditors of the Company with respect to
deferred compensation plan benefits. Compensation deferred pursuant
to the plan totaled $118,000 and $0 during the three-month periods
ended March 31, 1999 and 1998, respectively.
Satellite Transponders
The Company entered into a purchase and lease-purchase option
agreement in August 1995 for the acquisition of satellite
transponders to meet its long-term satellite capacity requirements.
The launch of the satellite in August 1998 failed. The Company did
not assume launch risk and the launch has been rescheduled for the
first quarter of 2000. The Company will continue to lease transponder
capacity until the delivery of the transponders on the replacement
satellite. The balance payable upon expected delivery of the
transponders during the first quarter of 2000, in addition to the
$9.1 million deposit previously paid, totals approximately $43.5
million.
Self-Insurance
The Company is self-insured for losses and liabilities related
primarily to health and welfare claims up to predetermined amounts
above which third party insurance applies. A reserve of $555,000 was
recorded at March 31, 1999 to cover estimated reported losses,
estimated unreported losses based on past experience modified for
current trends, and estimated expenses for investigating and settling
claims. Actual losses will vary from the recorded reserve. While
management uses what it believes is pertinent information and factors
in determining the amount of reserves, future additions to the
reserves may be necessary due to changes in the information and
factors used.
Litigation and Disputes
The Company is from time to time involved in various lawsuits, legal
proceedings and regulatory matters that have arisen in the normal
course of business. While the ultimate results of these matters
cannot be predicted with certainty, management does not expect them
to have a material adverse effect on the financial position, results
of operations or liquidity of the Company.
Cable Service Rate Reregulation
Effective March 31, 1999, the rates for cable programming services
(service tiers above basic service) are no longer regulated. This
regulation ended pursuant to provisions of the Telecommunications Act
of 1996 and the regulations adopted pursuant thereto by the Federal
Communications Commission ("FCC").
Federal law still permits regulation of basic service rates. However,
Alaska state law provides that cable television service is exempt
from regulation by the Alaska Public Utilities Commission ("APUC")
unless 25% of a system's subscribers request such regulation by
filing a petition with the APUC. At March 31, 1999, only the Juneau
system is subject to APUC regulation of its basic service rates. No
petition requesting regulation has been filed for any other system.
(The Juneau system serves 8.3% of the Company's total basic service
subscribers at March 31, 1999.) Juneau's current rates have been
approved by the APUC and there are no other pending filings with the
APUC, therefore, there is no refund liability for basic service at
this time.
16 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Undersea Fiber Optic Cable Contract Commitment
The Company signed a contract in July 1997 for construction of the
undersea portion of a fiber optic cable system connecting the cities
of Anchorage, Juneau, and Seattle via a subsea route. The total
system is expected to cost approximately $125 million. Subsea and
terrestrial connections extended the fiber optic cable to Fairbanks
via Whittier and Valdez. Construction efforts began in September 1998
and were completed in early February 1999. Commercial services
commenced in February 1999. Pursuant to the contract, the Company has
paid $86.3 million through December 31, 1998 and $424,000 during the
three-month period ended March 31, 1999, and will pay the remaining
balance in installments in April 1999. Approximately $39.4 million of
proceeds from the 1997 public offerings (see the Company's December
31, 1998 annual report on Form 10-K), net of the $9.1 million paid in
1997, were contributed to Alaska United. In January 1998, the Company
secured $75 million in bank financing to fund the remaining cost of
construction and deployment, of which $66.1 million was outstanding
at March 31, 1999 (see note 3).
Year 2000
In 1997, the Company initiated a plan to identify, assess and
remediate Year 2000 issues within each of its significant computer
programs and certain equipment which contain micro-processors. The
plan is addressing the issue of computer programs and embedded
computer chips being unable to distinguish between the year 1900 and
the year 2000, if a program or chip uses only two digits rather than
four to define the applicable year. The Company has divided the plan
into two major phases. The first phase, including team formation,
inventory assessment, compliance assessment and risk assessment, were
completed during 1998. The second phase, including
resolution/remediation, validation, contingency planning and sign-off
acceptance, was in progress at December 31, 1998. Systems which have
been determined not to be Year 2000 compliant are being either
replaced or reprogrammed, and thereafter tested for Year 2000
compliance. The plan anticipates that by mid-1999 the conversion,
implementation and testing phases will be completed. The current
budget for the total cost of remediation (including replacement
software and hardware) and testing, as set forth in the plan, is
approximately $4.0 million.
The Company is in the process of identifying and contacting critical
suppliers and customers whose computerized systems interface with the
Company's systems, regarding their plans and progress in addressing
their Year 2000 issues. The Company has received varying information
from such third parties on the state of compliance or expected
compliance. Contingency plans continue to be developed in the event
that any critical supplier or customer is not compliant. The failure
to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities
or operations. Such failures could materially and adversely affect
the Company's operations, liquidity and financial condition. Due to
the general uncertainty inherent in the Year 2000 problem, resulting
in part from the uncertainty of the Year 2000 readiness of
third-party suppliers and customers, the Company is unable to
determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's operations, liquidity or
financial condition.
17 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) Subsequent Event
The Company issued 20,000 shares of convertible redeemable accreting
preferred stock ("Preferred Stock") on April 30, 1999. Proceeds
totaling $20 million (before payment of costs and expenses) will be
used for general corporate purposes, to repay outstanding
indebtedness, and to provide additional liquidity. The Company's
amended Senior Holdings Loan facilities limit use of such proceeds.
The Preferred Stock contains a $1,000 per share liquidation
preference, plus accrued but unpaid dividends and fees. Dividends are
payable semi-annually at the rate of 8.5% of the liquidation
preference. Prior to the four-year anniversary following closing,
dividends are payable, at the Company's option, in cash or in
additional fully-paid shares of Preferred Stock. Dividends are
payable only in cash following the four-year anniversary of closing.
Mandatory redemption is required 12 years from the date of closing.
The Company may redeem the Preferred Stock after the four-year
anniversary of its issuance, and must redeem the Preferred Stock upon
the occurrence of a triggering event. The holders may convert the
Preferred Stock into Class A common stock of the Company at any time
after the four-year anniversary of the issuance of the Preferred
Stock, at a price of $5.55 per share. At any time subsequent to the
third anniversary following closing, and assuming the stock is
trading at no less than two times the conversion price, the Company
may require immediate conversion. The Preferred Stock, subject to
lender approval, is exchangeable in whole or in part, at the
Company's option, into subordinated debt with terms and conditions
comparable to those governing the Preferred Stock. The Preferred
Stock is senior to all other classes of the Company's equity
securities, and has voting rights equal to that number of shares of
common stock into which it can be converted.
Holders of the Preferred Stock shares will have the right to vote on
all matters presented for vote to the holders of common stock on an
as-converted basis. Additionally, the Preferred Stock offering
requires as long as the Preferred Stock shares remain outstanding and
unconverted, the holders of it will have the right to vote, as a
class, and the Company must obtain the written consent of holders of
a majority (or higher as required by Alaska law) of that stock to
take certain actions, some of which require shareholder approval
necessitating amendment of the Company's Articles of Incorporation.
With the issuance of the Preferred Stock shares, the holders of that
stock may recommend one individual to the Company's Board of
Directors ("Board"). Under the terms of the Preferred Stock offering,
the Board will expand its size from the present nine to ten seats
and, upon qualification, appoint that individual to that new seat to
serve until the next shareholder meeting. At that shareholder
meeting, the individual would be required to stand for election to
complete the term of the class of directors to which the individual
was assigned. The offering also provides that the Board include the
individual recommended by those holders on the subsequent Board slate
for election of directors and actively to seek the election of that
individual to the Board. The offering further provides that, should
the holders of common stock of the Company not elect that individual,
the holders of the Preferred Stock Shares will have the right to
appoint an observer at the meetings of the Board. The offering also
provides that these rights of the holders of Preferred Stock shares
relating to the Board seat and observer are to remain effective so
long as any of the Preferred Stock shares remain outstanding.
18
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Interim Condensed Consolidated Financial Statements and the notes
thereto. See - Cautionary Statement Regarding Forward-Looking Statements.
OVERVIEW
The Company has experienced significant growth in recent years through both
strategic acquisitions and growth in its existing businesses. The Company has
historically met its cash needs for operations through its cash flows from
operating activities. Cash requirements for acquisitions and capital
expenditures have been provided largely through the Company's financing
activities.
Long-distance services. The Company's provision of interstate and intrastate
long-distance services to residential, commercial and governmental customers and
to other common carriers (principally MCI WorldCom and Sprint) accounted for
approximately 92.7% of the Company's total long-distance services revenues
during the first quarter of 1999. Factors that have the greatest impact on
year-to-year changes in long-distance services revenues include the rate per
minute charged to customers and usage volumes, usually expressed as minutes of
use. These factors in turn depend in part upon economic conditions in Alaska.
The economy of Alaska is dependent upon the natural resource industries, in
particular oil production, as well as tourism, government and United States
military spending.
The Company's long-distance cost of sales and services has consisted principally
of the direct costs of providing services, including local access charges paid
to Local Exchange Carriers ("LECs") for the origination and termination of
long-distance calls in Alaska, fees paid to other long-distance carriers to
carry calls that terminate in areas not served by the Company's network
(principally the lower 49 states, most of which calls are carried over MCI
WorldCom's network, and international locations, which calls are carried
principally over Sprint's network), and the cost of equipment sold to the
Company's customers. During the first quarter of 1999, local access charges
accounted for 44.4% of long-distance cost of sales and services, fees paid to
other long-distance carriers represented 31.1%, satellite transponder lease and
undersea fiber maintenance costs represented 11.8%, telecommunications equipment
accounted for 1.9%, network solutions and outsourcing costs represented 5.2% and
other costs represented 5.6% of long-distance cost of sales and services.
The Company's long-distance selling, general, and administrative expenses have
consisted of operating and engineering, customer service, sales and
communications, management information systems, general and administrative,
legal and regulatory expenses. Most of these expenses consist of salaries, wages
and benefits of personnel and certain other indirect costs (such as rent,
travel, utilities, insurance and property taxes). A significant portion of
long-distance selling, general, and administrative expenses, 23.9% during the
first quarter of 1999, represents the cost of the Company's advertising,
promotion and market analysis programs.
19 (Continued)
Long-distance services face significant competition from AT&T Alascom, Inc.,
long-distance resellers, and from local telephone companies that have entered
the long-distance market. Revenues derived from other common carriers increased
3.5% in the first quarter of 1999 as compared to the first quarter of 1998. The
number of active long-distance residential, commercial and small business
customers decreased 2.5% in the first quarter of 1999 as compared to the same
period of 1998, and increased 4.4% as compared to the fourth quarter of 1998.
The Company believes its approach to developing, pricing, and providing
long-distance services and bundling different business segment services will
continue to allow it to be competitive in providing those services.
Other common carrier traffic routed to the Company for termination in Alaska is
largely dependent on traffic routed to MCI WorldCom and Sprint by their
customers. Pricing pressures, new program offerings and market consolidation
continue to evolve in the markets served by MCI WorldCom and Sprint. If, as a
result, their traffic is reduced, or if their competitors' costs to terminate or
originate traffic in Alaska are reduced, the Company's traffic will also likely
be reduced, and the Company's pricing may be reduced to respond to competitive
pressures. The Company is unable to predict the effect on the Company of such
changes, however given the materiality of other common carrier revenues to the
Company, a significant reduction in traffic or pricing could have a material
adverse effect on the Company's financial position, results of operations and
liquidity.
Services included in the Other segment as described in note 4 to the
accompanying interim condensed consolidated financial statements are included in
the Long-distance Services segment for purposes of this Management's Discussion
and Analysis.
Cable services. During the first quarter of 1999, cable revenues represented
24.6% of consolidated revenues. The cable systems serve 26 communities and areas
in Alaska, including the state's three largest population centers, Anchorage,
Fairbanks and Juneau.
The Company generates cable services revenues from three primary sources: (1)
programming services, including monthly basic or premium subscriptions and
pay-per-view movies or other one-time events, such as sporting events; (2)
equipment rentals or installation; and (3) advertising sales. During the first
quarter of 1999 programming services generated 86.1% of total cable services
revenues, equipment rental and installation fees accounted for 8.6% of such
revenues, advertising sales accounted for 4.0% of such revenues, and other
services accounted for the remaining 1.3% of total cable services revenues. The
primary factors that contribute to year-to-year changes in cable services
revenues are average monthly subscription and pay-per-view rates, the mix among
basic, premium and pay-per-view services, and the average number of subscribers
during a given reporting period.
The cable systems' cost of sales and selling, general and administrative
expenses have consisted principally of programming and copyright expenses,
labor, maintenance and repairs, marketing and advertising and rental expense.
During the first quarter of 1999 programming and copyright expenses represented
approximately 46.1% of total cable cost of sales and selling, general and
administrative expenses. Marketing and advertising costs represented
approximately 8.5% of such total expenses.
Cable services face competition from alternative methods of receiving and
distributing television signals and from other sources of news, information and
entertainment. The Company believes its cable television services will continue
to be competitive based on providing, at reasonable prices, a greater variety of
programming and other communication services than are available off-air or
through other alternative delivery sources and upon superior technical
performance and customer service.
20 (Continued)
Local access services. The Company generates local access services revenues from
four primary sources: (1) business and residential basic dial tone revenues; (2)
business private line and special access revenues; (3) reciprocal access
revenues from the incumbent LEC serving Anchorage; and (4) business and
residential features and other charges, including voice mail, caller ID,
distinctive ring, inside wiring and subscriber line charges. Effective March
1999 the Company expects to transition to the "bill and keep" cost settlement
method for termination of traffic on its and other's facilities. Local exchange
services revenues totaled $3.7 million representing 6.0% of consolidated
revenues in the first quarter of 1999. The primary factors that contribute to
year-to-year changes in local access services revenues are the average number of
business and residential subscribers to the Company's services during a given
reporting period and the average monthly rates charged for non-traffic sensitive
services.
Operating and engineering expenses represented approximately 4.4% of total local
access services cost of sales and selling, general and administrative expenses
during the first quarter of 1999. Marketing and advertising costs represented
approximately 6.5% of such total expenses, customer service and general and
administrative costs represented approximately 50.4% of such total expenses, and
local access cost of sales represented approximately 38.7% of such total
expenses. The Company expects that it will continue to generate operating losses
from local exchange services during 1999.
The Company's local access services face significant competition from ATU and
AT&T Alascom, Inc. The Company believes its approach to developing, pricing, and
providing local access services will allow it to be competitive in providing
those services.
Internet services. The Company began offering Internet services in several
markets in Alaska during 1998. The Company generates Internet services revenues
from three primary sources: (1) access product services, including commercial
Dial-in Access ("DIAS"), Internet Service Provider ("ISP") DIAS, and retail
dial-up service revenues; (2) SchoolAccess(TM) DIAS and server revenues; and (3)
network management services. Internet services revenues totaled $2.0 million
representing 3.2% of total revenues in the first quarter of 1999. The primary
factors that contribute to year-to-year changes in Internet services revenues
are average monthly subscription rates, the number of additional premium
features selected, and the average number of subscribers to the Company's
services during a given reporting period.
Operating and general and administrative expenses represented approximately
68.5% of total Internet services cost of sales and selling, general and
administrative expenses during the first quarter of 1999. Internet cost of sales
represented approximately 24.2% of such total expenses and marketing and
advertising represented approximately 7.3% of such total expenses.
Significant new marketing campaigns were introduced in February and March 1999
featuring bundled residential and commercial Internet products. Additional
bandwidth was made available to the Company's Internet segment resulting from
completion of the Alaska United Project (see the Company's December 31, 1998
annual report on Form 10-K). The new Internet offerings are coupled with the
Company's long-distance and local services offerings and provide free basic
Internet services if certain long-distance or local services plans are selected.
Value-added premium Internet features are available for additional charges.
The Company competes with a number of Internet service providers in its markets.
The Company believes its approach to developing, pricing, and providing Internet
services will allow it to be competitive in providing those services.
Other services, other expenses and net loss. Telecommunications services
revenues reported in the Other segment as described in note 4 to the
accompanying interim condensed consolidated financial statements have been
attributable to corporate network management contracts, telecommunications
equipment sales and
21 (Continued)
service, other miscellaneous revenues (including revenues from prepaid and debit
calling cards, the installation and leasing of customers' very small aperture
terminal ("Vsat") equipment, and fees charged to MCI WorldCom and Sprint for
certain billing services), and costs associated with PCS wireless communications
services. The Company began developing plans for PCS service deployment in 1995
and subsequently conducted a technical trial of its candidate technology. The
Company has invested approximately $2.2 million in its PCS license at March 31,
1999. PCS licensees are required to offer service to at least one-third of their
market population within five years or risk losing their licenses. Service must
be extended to two-thirds of the population within 10 years. The Company
continues to reevaluate its wireless strategy and expects that such strategy
will allow retention of the PCS license pursuant to its terms.
Depreciation and amortization and interest expense on a consolidated basis is
expected to be higher in 1999 as compared to 1998 resulting primarily from
additional depreciation on 1998 and 1999 capital expenditures, additional
outstanding long-term debt and a reduction in the amount of capitalized
construction period interest following placement of the Alaska United undersea
fiber optic cable into service in early February 1999. As a result, the Company
anticipates recording net losses in 1999.
RESULTS OF OPERATIONS
The following table sets forth selected Statement of Operations data as a
percentage of total revenues for the periods indicated and the percentage
changes in such data as compared to the corresponding prior year period:
(Underlying data rounded to the nearest thousands)
Three Months Ended Percentage
March 31, Change
1999 vs.
(Unaudited) 1999 1998 1998
---- ---- ----
Statement of Operations Data:
Revenues
Long-distance services 66.2% 72.4% (3.6%)
Cable services 24.6% 24.4% 6.3%
Local access services 6.0% 1.7% 270.0%
Internet services 3.2% 1.5% 122.2%
---------------------------------------
Total revenues 100.0% 100.0% 5.3%
Cost of sales and services 45.4% 47.0% 2.0%
Selling, general and administrative
expenses 38.4% 35.0% 15.8%
Depreciation and amortization 16.8% 13.9% 27.2%
---------------------------------------
Operating income (loss) (0.6%) 4.1% (116.7%)
Net loss before income taxes
and cumulative effect of a
change in accounting principle (11.9%) (4.3%) (192.0%)
Net loss before cumulative
effect of a change in
accounting principle (7.4%) (2.8%) (181.3%)
Net loss (7.9%) (2.8%) (206.3%)
22 (Continued)
Three Months Ended Percentage
March 31, Change
1999 vs.
(Unaudited) 1999 1998 1998
---- ---- ----
Other Operating Data (1):
Cable operating income (2) 17.2% 15.5% 18.2%
Local operating loss (3) (56.8%) (320.0%) 34.4%
Internet operating income (4) 0.0% 33.3% 100.0%
<FN>
- -----------------------------
(1) Includes customer service, marketing and advertising costs.
(2) Computed as a percentage of total cable services revenues.
(3) Computed as a percentage of total local access services revenues.
(4) Computed as a percentage of total Internet services revenues.
</FN>
THREE MONTHS ENDED MARCH 31, 1999 ("1999") COMPARED TO THREE MONTHS ENDED MARCH
31, 1998 ("1998")
Revenues. Total revenues increased 5.3% from $58.2 million in 1998 to $61.3
million in 1999. Long-distance revenues from commercial, residential,
governmental, and other common carrier customers decreased 4.3% from $39.3
million in 1998 to $37.6 million in 1999. The long-distance revenue decline in
1999 was largely due to the following:
- 1.2% decrease in interstate minutes of use to 156.7 million minutes
off-set by a 5.92% increase in intrastate minutes of use to 34.8
million minutes;
- 2.5% reduction in the number of active residential, small business and
commercial customers billed from 87,800 at March 31, 1998 to 85,600 at
March 31, 1999; and
- 6.9% reduction in the Company's average rate per minute on
long-distance traffic from $0.173 per minute in 1998 to $0.161 per
minute in 1999. The decrease in rates resulted from the Company's
promotion of and customers' enrollment in new calling plans offering
discounted rates and length of service rebates, such new plans being
prompted in part by the Company's primary long-distance competitor,
AT&T Alascom, reducing its rates and entry of LECs into long-distance
markets served by the Company.
The decrease in long-distance revenues was partially off-set by the following:
- New revenues in 1999 totaling $575,000 from the lease of three DS3
circuits on Alaska United facilities within Alaska, and between Alaska
and the lower 48 states; and
- 3.5% increase in revenues from other common carriers (principally MCI
WorldCom and Sprint), from $14.4 million in 1998 to $14.9 million in
1999.
Cable revenues increased 6.3% from $14.2 million in 1998 to $15.1 million in
1999. Programming services revenues increased 7.35% to $13.0 million in 1999
resulting from an increase of approximately 2,500 basic subscribers served by
the Company, an increase of $1.78 in revenue per average basic subscriber per
month and increased pay-per-view and premium service revenues. New facility
construction efforts in the summer of 1998 resulted in additional homes passed
which contributed to additional subscribers and revenues in 1999. Other factors
included facility upgrades which allowed the introduction of digital cable
services in Anchorage in the fourth quarter of 1998, increased promotional and
advertising efforts in the fourth quarter of 1998 and the first quarter of 1999,
and increases in basic and premium service rates in certain locations in the
second quarter of 1998. Advertising sales revenues increased 23.6% to $607,000
in 1999 due to increased promotion of the Company's advertising and ad insertion
capabilities. Equipment rental and
23 (Continued)
installation revenues increased 19.6% to $1.3 million in 1999 due to increased
equipment rentals and installation services provided by the Cable services
industry segment.
Local access services revenues increased from $1.0 million in 1998 to $3.7
million in 1999. At March 31, 1999 approximately 31,500 lines were in service
and approximately 1,800 additional lines were awaiting connection.
Internet services revenues increased from $903,000 in 1998 to $2.0 million in
1999. The Company had approximately 20,500 active residential, commercial and
small business retail dial-up subscribers to its Internet service at March 31,
1999.
Cost of sales and services. Cost of sales and services totaled $27.3 million in
1998 and $27.9 million in 1999. As a percentage of total revenues, cost of sales
and services decreased from 47.0% in 1998 to 45.4% in 1999. The decrease in cost
of sales and services as a percentage of revenues is primarily attributed to
changes in the Company's product mix due to the continuing development of new
product lines (local access services and Internet), and reduced long-distance
cost of sales as a percentage of long-distance revenues. The overall margin
improvement was partially offset by increased cable services cost of sales as a
percentage of cable services revenues.
The decrease in long-distance cost of sales and services as a percentage of
revenues is primarily attributed to avoidance of access charges resulting from
the Company's distribution and termination of its traffic on its own network
instead of paying other carriers to distribute and terminate its traffic.
Partially offsetting the 1999 decrease as compared to 1998 was a refund received
in the first quarter of 1998 totaling approximately $1.1 million from a local
exchange carrier in respect of its earnings that exceeded regulatory
requirements. The Company expects margins to widen as increasing amounts of
traffic are carried on its own facilities.
Cable cost of sales and services as a percentage of revenues is less as a
percentage of revenues than are long-distance, local access and Internet
services cost of sales and services. Cable services rate increases did not keep
pace with increases in programming and copyright costs in 1999. Programming
costs increased on most of the Company's offerings and the Company incurred
additional costs on new programming introduced in 1998.
Local access services cost of sales and services totaled 52.5% and 86.3% as a
percentage of the 1999 and 1998 local access services revenues, respectively.
Internet services cost of sales and services totaled 21.1% and 46.7% as a
percentage of the 1999 and 1998 Internet services revenues, respectively. The
Company's local access operations commenced in 1997 and Internet services
operations commenced in 1998. Fluctuations in cost of sales and services as a
percentage of revenues are expected to occur as new product lines mature.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 15.8% from $20.3 million in 1998 to $23.5
million in 1999, and, as a percentage of revenues, increased from 35.0% in 1998
to 38.3% in 1999. The 1999 increase resulted from:
- Internet services operating, engineering, sales, customer service and
administrative cost increases, from $96,000 in 1998 as compared to $1.2
million in 1999. The Company gradually introduced its Internet services
through the third quarter of 1998 and increased advertising efforts in
the fourth quarter of 1998 and first quarter of 1999. The increase in
costs was necessary to provide the operations, engineering, customer
service and support infrastructure necessary to accommodate expected
growth in the Company's Internet services customer base.
24 (Continued)
- Local access services operating, engineering, sales, customer service
and administrative cost increased from $2.2 million in 1998 as compared
to $3.1 million in 1999. The Company initiated local access services in
September 1997. The increase was necessary to provide the operations,
engineering, customer service and support infrastructure necessary to
accommodate the growth in the Company's local access services customer
base.
- Increased long-distance sales, advertising, telemarketing, carrier
relations, business development and rural services costs totaling $3.1
million in 1998 compared to $4.8 million in 1999. Increased selling
costs were associated with the introduction of various marketing plans
and other proprietary rate plans and cross promotion of products and
services.
- Increased allowance for doubtful accounts receivable.
Depreciation and amortization. Depreciation and amortization expense increased
27.2% from $8.1 million in 1998 to $10.3 million in 1999. The increase is
attributable to the Company's investment in $58.4 million of facilities placed
into service during 1998 for which a full year of depreciation will be recorded
during 1999, the $117.3 million of facilities placed into service in the first
quarter of 1999 for which 11 months of depreciation will be recorded during 1999
and the $7.0 million of facilities placed into service in the first quarter of
1999 for which a partial year of depreciation will be recorded during 1999.
Facilities placed into service during the first quarter of 1999 consist
primarily of the Alaska United undersea fiber optic cable completed in early
February 1999.
Interest expense, net. Interest expense, net of interest income, increased 42.9%
from $4.9 million in 1998 to $7.0 million in 1999. This increase resulted
primarily from increases in the Company's average outstanding indebtedness
resulting primarily from construction of new long-distance and Internet
facilities, expansion and upgrades of cable television facilities, and
investment in local access services equipment and facilities. During 1998
interest expense was offset in part by capitalized construction period interest.
During 1999 the Company will experience a significant reduction in the amount of
construction period interest capitalized due to the completion of the Alaska
United undersea fiber optic cable which was placed into service in early
February 1999.
Income tax benefit. Income tax benefit increased from $891,000 in 1998 to $3.1
million in 1999 due to the Company incurring a larger net loss before income
taxes and cumulative effect of a change in accounting principle in 1999 as
compared to 1998. The Company's effective income tax rate increased from 35.5%
in 1998 to 38.6% in 1999 due to the increased net loss and the proportional
amount of items that are nondeductible for income tax purposes.
In conjunction with the 1996 Cable Companies acquisition, the Company incurred a
net deferred income tax liability of $24.4 million and acquired net operating
losses totaling $57.6 million. The Company determined that approximately $20
million of the acquired net operating losses would not be utilized for income
tax purposes, and elected with its December 31, 1996 income tax returns to
forego utilization of such acquired losses under Internal Revenue Code section
1.1502-32(b)(4). Deferred tax assets were not recorded associated with the
foregone losses and, accordingly, no valuation allowance was provided. At March
31, 1999, the Company has (1) tax net operating loss carryforwards of
approximately $55.8 million that will begin expiring in 2008 if not utilized,
and (2) alternative minimum tax credit carryforwards of approximately $2.0
million available to offset regular income taxes payable in future years. The
Company's utilization of remaining net operating loss carryforwards is subject
to certain limitations pursuant to Internal Revenue Code section 382.
Tax benefits associated with recorded deferred tax assets are considered to be
more likely than not realizable through taxable income earned in carryback
years, future reversals of existing taxable temporary differences, and future
taxable income exclusive of reversing temporary differences and carryforwards.
The
25 (Continued)
amount of deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income during the carryforward
period are reduced. The Company estimates that its effective income tax rate for
financial statement purposes will be approximately 38% in 1999. The Company
expects that its operations will generate net income before income taxes during
the carryforward periods to allow utilization of loss carryforwards for which no
allowance has been established.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The following chart provides selected unaudited statement of operations data
from the Company's quarterly results of operations during 1999 and 1998:
First Second Third Fourth Total
(Unaudited) Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------------------
1999 (Dollars in thousands, except per share amounts)
----
Revenues
Long-distance services $ 40,593 40,593
Cable services 15,062 15,062
Local access services 3,714 3,714
Internet services 1,969 1,969
-----------------------------------------------------------------------
Total revenues 61,338 61,338
Operating loss (368) (368)
Net loss before income taxes and
cumulative effect of a change in
accounting principle (7,328) (7,328)
Net loss before cumulative effect
of a change in accounting
principle (4,521) (4,521)
Net loss $ (4,865) (4,865)
=======================================================================
Basic loss per share:
Loss before cumulative effect of a change
in accounting principle $ (0.10) (0.10)
Cumulative effect of a change
in accounting principle --- ---
-----------------------------------------------------------------------
Net loss $ (0.10) (0.10)
=======================================================================
Diluted loss per share:
Loss before cumulative effect
of a change in accounting
principle $ (0.10) (0.10)
Cumulative effect of a change
in accounting principle --- ---
-----------------------------------------------------------------------
Net loss $ (0.10) (0.10)
=======================================================================
26 (Continued)
First Second Third Fourth Total
(Unaudited) Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------------------
1998 (Dollars in thousands, except per share amounts)
----
Revenues
Long-distance services $ 42,034 45,838 44,478 42,306 174,656
Cable services 14,201 14,041 14,484 14,914 57,640
Local access services 1,014 2,048 2,744 4,102 9,908
Internet services 903 1,014 1,060 1,614 4,591
-----------------------------------------------------------------------
Total revenues 58,152 62,941 62,766 62,936 246,795
Operating income 2,437 1,447 1,730 3,230 8,844
Net loss $ (1,616) (2,066) (2,076) (1,039) (6,797)
=======================================================================
Basic net loss per share $ (0.03) (0.04) (0.04) (0.02) (0.14)
=======================================================================
Diluted net loss per share $ (0.03) (0.04) (0.04) (0.02) (0.14)
=======================================================================
Revenues. Total revenues for the quarter ended March 31, 1999 ("first quarter of
1999") were $61.3 million, representing a 2.5% decrease from total revenues in
the quarter ended December 31, 1998 ("fourth quarter of 1998") of $62.9 million.
The decrease in long-distance services revenues resulted primarily a one-time
$1.6 million product sale in the fourth quarter of 1998. Partially offsetting
this decrease were additional revenues associated with a 4.4% increase in the
number of active long-distance residential, small business and commercial
customers billed from 81,900 at December 31, 1998 to 85,600 at March 31, 1999.
The Company's long-distance average-rate-per-minute remained constant at $0.16
during 1999 as compared to 1998. Revenues from other common carriers
(principally MCI WorldCom and Sprint) increased from $14.6 million in the fourth
quarter of 1998 to $14.9 million in the first quarter of 1999.
Long-distance revenues have historically been highest in the summer months as a
result of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers spend more time at home and tend to watch more
television during these months. Local service operations are not expected to
exhibit significant seasonality. The Company's ability to implement construction
projects is also hampered during the winter months because of cold temperatures,
snow and short daylight hours.
Cost of sales and services. Cost of sales and services decreased 6.1% from $29.7
million in the fourth quarter of 1998 to $27.9 million in the first quarter of
1999. The decrease in cost of sales and services resulted primarily from a
one-time $1.3 million product cost of sale in the fourth quarter of 1998. As a
percentage of revenues, the first quarter of 1999 cost of sales and services was
45.4% as compared to 47.2 % for the fourth quarter of 1998. The decrease in the
cost of sales and services as a percentage of revenues is primarily due to the
growth of the Company's new product lines and avoidance of access charges
resulting from the Company's distribution and termination of its traffic on its
own network instead of paying other carriers to distribute and terminate its
traffic.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $500,000 in the first quarter of 1999 from
$23.0 million in the fourth quarter of 1998. As a percentage of revenues, first
quarter of 1999 selling, general and administrative expenses were 38.4% as
compared to 36.5% for the fourth quarter of 1998.
Net loss. The Company reported a net loss of $4.9 million for the first quarter
of 1999 as compared to a net loss of $1.1 million during the fourth quarter of
1998. In addition to the impact of factors described above, the increased net
loss was attributable to increased depreciation and interest expense incurred
during the first quarter of 1999 as compared to the fourth quarter of 1998 due
to the placement of the Alaska United
27 (Continued)
undersea fiber optic cable into service in early February 1999. During the
fourth quarter of 1998, capitalized construction period interest served to
reduce interest expense. Interest capitalization ceased when the Alaska United
undersea fiber optic cable was placed into service.
LIQUIDITY AND CAPITAL RESOURCES
The Company's first quarter of 1999 ("1999") cash flows from operating
activities totaled $187,000, net of changes in the components of working
capital. An additional source of cash during 1999 was long-term borrowings of
$4.9 million. The Company's expenditures for property and equipment, including
construction in progress, totaled $9.9 million and $28.2 million in 1999 and the
first quarter of 1998 ("1998"), respectively. Uses of cash during 1999 also
included repayment of $490,000 of long-term borrowings and capital lease
obligations and purchases of other assets totaling $391,000.
Net receivables decreased $2.4 million from December 31, 1998 to March 31, 1999.
The decrease resulted from a $2.0 million reclassification of income tax
receivable to long-term deferred tax asset as the Company has utilized all net
operating losses against income taxes paid in prior periods, therefore
refundable amounts are now included in long-term deferred tax asset and will be
realized as future taxable income is generated.
Working capital totaled $3.8 million at March 31, 1999, a $4.6 million decrease
from the working capital of $8.4 million as of December 31, 1998. The decrease
in working capital is primarily attributed to the investment of current assets
in long-term capital assets.
The Holdings $200,000,000 ($150,000,000 as amended) and $50,000,000 credit
facilities mature June 30, 2005. The Holdings Loan facilities were amended in
April 1999 (see below) and bear interest, as amended, at either Libor plus 1.00%
to 2.50%, depending on the leverage ratio of Holdings and certain of its
subsidiaries, or at the greater of the prime rate or the federal funds effective
rate (as defined) plus 0.05%, in each case plus an additional 0.00% to 1.375%,
depending on the leverage ratio of Holdings and certain of its subsidiaries.
$106.7 million were drawn on the credit facilities as of March 31, 1999 and
December 31, 1998.
On April 13, 1999, the Company amended its Holdings credit facilities. These
amendments contain, among other things, provisions for payment of a one-time
amendment fee of 0.25% of the aggregate commitment, an increase in the
commitment fee by 0.125% per annum on the unused portion of the commitment, and
an increase in the interest rate of 0.25%. The amended facilities reduce the
aggregate commitment by $50 million to $200 million, and limit capital
expenditures to $35 million in 1999, $35 million in 2000 with no limits
thereafter (excluding amounts to be paid for purchased satellite transponder
facilities). The amended facilities require that Holdings receive $20 million in
proceeds from a GCI preferred stock issuance by May 31, 1999 (see below).
Holding's credit facilities and GCI, Inc.'s senior notes contain restrictions on
the operations and activities of the Company, including requirements that the
Company comply with certain financial covenants and financial ratios. Under the
amended Holding's credit facility, Holdings may not permit the ratio of senior
debt to annualized operating cash flow (as defined) of Holdings and certain of
its subsidiaries to exceed 3.5 to 1.0 through March 31, 1999 (3.0 to 1.0 from
April 1, 1999 through December 31, 1999), total debt to annualized operating
cash flow to exceed 7.0 to 1.0 from closing of the amendments to June 30, 1999
(6.25 to 1.00 from July 1, 1999 through March 31, 2000), and annualized
operating cash flow to interest expense to exceed 1.5 to 1.0 from closing of the
amendments to September 30, 1999 (1.75 to 1.0 from October 1, 1999 through
December 31, 1999). Each of the foregoing ratios decreases in specified
increments during the life of the credit facility. The credit facility requires
Holdings to maintain a ratio of annualized operating cash flow to debt service
of Holdings and certain of its subsidiaries of at least 1.25 to 1.0, and
annualized
28 (Continued)
operating cash flow to fixed charges of at least 1.0 to 1.0 (which adjusts to
1.05 to 1.0 in April, 2003 and thereafter). The senior notes impose a
requirement that the leverage ratio of GCI, Inc. and certain of its subsidiaries
not exceed 7.5 to 1.0 prior to December 31, 1999 and 6.0 to 1.0 thereafter,
subject to the ability of GCI, Inc. and certain of its subsidiaries to incur
specified permitted indebtedness without regard to such ratios.
On January 27, 1998 Alaska United closed a $75 million project finance facility
("Fiber Facility") to construct a fiber optic cable system connecting Anchorage,
Fairbanks, Valdez, Whittier, Juneau and Seattle. The Fiber Facility bears
interest at either Libor plus 3.0%, or at the lender's prime rate plus 1.75%.
The interest rate will decline to Libor plus 2.5%-2.75%, or, at the Company's
option, the lender's prime rate plus 1.25%-1.5% after the project completion
date and when the loan balance is $60,000,000 or less. Alaska United is required
to pay a commitment fee equal to 0.375% per annum on the unused portion of the
commitment. $66.1 million was borrowed under the facility at March 31, 1999. The
Fiber Facility is a 10-year term loan that is interest only for the first 5
years. The facility can be extended an additional two years at any time between
the second and fifth anniversary of closing the facility if the Company can
demonstrate projected revenues from certain capacity commitments will be
sufficient to pay all operating costs, interest, and principal installments
based on the extended maturity.
The Fiber Facility contains, among others, covenants requiring certain
intercompany loans and advances in order to maintain specific levels of cash
flow necessary to pay operating costs, interest and principal installments. The
Fiber Facility also contains a guarantee that requires, among other terms and
conditions, Alaska United complete the project by the completion date and pay
any non-budgeted costs of the project. All of Alaska United's assets, as well as
a pledge of the partnership interests' owning Alaska United, collateralize the
Fiber Facility. Construction of the fiber facility was completed and the
facility was placed into service on February 4, 1999. The project was completed
on-budget.
The Company will use approximately one-half of the Alaska United system capacity
in addition to its existing owned and leased facilities to carry its own
traffic. One of the Company's large commercial customers signed agreements in
February and March 1999 for the immediate lease of three DS3 circuits on Alaska
United facilities within Alaska, and between Alaska and the lower 48 states. The
lease agreements provide for three year terms, with renewal options for
additional terms. The Company continues to pursue opportunities to lease
additional capacity on its system.
The Company's expenditures for property and equipment, including construction in
progress, totaled $9.9 million and $28.2 million during 1999 and 1998,
respectively. The Company anticipates that its capital expenditures in 1999 may
total as much as $35 million. Planned capital expenditures over the next five
years include those necessary for continued expansion of the Company's
long-distance, local exchange and Internet facilities, the development and
construction of a PCS network, and continued upgrades to its cable television
plant, and approximately $43.5 million for satellite transponders. Sources of
funds for these planned capital expenditures are expected to include internally
generated cash flows and borrowings under the Company's credit facilities
described above.
The Company's ability to invest in discretionary capital and other projects will
depend upon its future cash flows and access to borrowings under its credit
facilities. Management anticipates that cash flow generated by the Company and
borrowings under its credit facilities will be sufficient to fund capital
expenditures and its working capital requirements. Should cash flows be
insufficient to support additional borrowings, such investment in capital
expenditures will likely be reduced.
The Company entered into a purchase and lease-purchase option agreement in
August 1995 for the acquisition of satellite transponders to meet its long-term
satellite capacity requirements. The launch of the
29 (Continued)
satellite in August 1998 failed. The Company did not assume launch risk and the
launch has been rescheduled for the first quarter of 2000. The Company will
continue to lease transponder capacity until the delivery of the transponders on
the replacement satellite. The balance payable upon expected delivery of the
transponders during the first quarter of 2000, in addition to the $9.1 million
deposit previously paid, totals approximately $43.5 million.
The Company issued 20,000 shares of convertible redeemable accreting preferred
stock ("Preferred Stock") on April 30, 1999. Proceeds totaling $20 million
(before payment of costs and expenses) will be used for general corporate
purposes, to repay outstanding indebtedness, and to provide additional
liquidity. The Company's amended Senior Holdings Loan facilities limit use of
such proceeds. The Preferred Stock contains a $1,000 per share liquidation
preference, plus accrued but unpaid dividends and fees. Dividends are payable
semi-annually at the rate of 8.5% of the liquidation preference. Prior to the
four-year anniversary following closing, dividends are payable, at the Company's
option, in cash or in additional fully-paid shares of Preferred Stock. Dividends
are payable only in cash following the four-year anniversary of closing.
Mandatory redemption is required 12 years from the date of closing.
The Company may redeem the Preferred Stock after the four-year anniversary of
its issuance, and must redeem the Preferred Stock upon the occurrence of a
triggering event. The holders may convert the Preferred Stock into Class A
common stock of the Company at any time after the four-year anniversary of the
issuance of the Preferred Stock, at a price of $5.55 per share. At any time
subsequent to the third anniversary following closing, and assuming the stock is
trading at no less than two times the conversion price, the Company may require
immediate conversion. The Preferred Stock, subject to lender approval, is
exchangeable in whole or in part, at the Company's option, into subordinated
debt with terms and conditions comparable to those governing the Preferred
Stock. The Preferred Stock is senior to all other classes of the Company's
equity securities, and has voting rights equal to that number of shares of
common stock into which it can be converted.
Holders of the Preferred Stock shares will have the right to vote on all matters
presented for vote to the holders of common stock on an as-converted basis.
Additionally, the Preferred Stock offering requires as long as the Preferred
Stock shares remain outstanding and unconverted, the holders of it will have the
right to vote, as a class, and the Company must obtain the written consent of
holders of a majority (or higher as required by Alaska law) of that stock to
take certain actions, some of which require shareholder approval necessitating
amendment of the Company's Articles of Incorporation.
With the issuance of the Preferred Stock shares, the holders of that stock may
recommend one individual to the Company's Board of Directors ("Board"). Under
the terms of the Preferred Stock offering, the Board will expand its size from
the present nine to ten seats and, upon qualification, appoint that individual
to that new seat to serve until the next shareholder meeting. At that
shareholder meeting, the individual would be required to stand for election to
complete the term of the class of directors to which the individual was
assigned. The offering also provides that the Board include the individual
recommended by those holders on the subsequent Board slate for election of
directors and actively to seek the election of that individual to the Board. The
offering further provides that, should the holders of common stock of the
Company not elect that individual, the holders of the Preferred Stock Shares
will have the right to appoint an observer at the meetings of the Board. The
offering also provides that these rights of the holders of Preferred Stock
shares relating to the Board seat and observer are to remain effective so long
as any of the Preferred Stock shares remain outstanding.
The long-distance services, local access services, cable services, Internet
services and wireless services industries are experiencing increasing
competition and rapid technological changes. The Company's future results of
operations will be affected by its ability to react to changes in the
competitive environment and by
30 (Continued)
its ability to fund and implement new technologies. The Company is unable to
determine how competition, technological changes and its net operating losses
will affect its ability to obtain financing.
The Company believes that it will be able to meet its current and long-term
liquidity and capital requirements, including fixed charges, through its cash
flows from operating activities, existing cash, cash equivalents, short-term
investments, credit facilities, and other external financing and equity sources.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133. In June 1998, the Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
years beginning after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments imbedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge criteria are met. Special accounting
for qualifying hedges allow a derivative's gains or losses to offset related
results on the hedged item in the income statement and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. Management of the Company expects that adoption
of SFAS No. 133 will not have a material impact on the Company's year-end 2000
financial statements.
EITF 98-14. In March 1999, the Financial Accounting Standards Board ("FASB")
Emerging Issues Task Force ("EITF") issued EITF Issue 98-14, "Debtor's
Accounting for Changes in Line-of-Credit or Revolving Debt Arrangements". EITF
Issue 98-14 establishes guidelines regarding unamortized costs associated with a
modified line-of-credit or revolving-debt arrangement and requires a debtor to
compare the new and old borrowing capacities upon the modification of
line-of-credit or revolving-debt arrangements. If the new borrowing capacity is
equal to or greater than the old borrowing capacity, the debtor should defer and
amortize any unamortized deferred costs over the term of the new arrangement. If
the new borrowing capacity is less than that available under the previous
arrangement, the debtor should amortize fees paid to the creditor and
third-party costs over the new term, any unamortized costs from the old
arrangement should be written off in proportion to the decreases in borrowing
capacity, with remaining unamortized costs attributable to the old arrangement
amortized over the term of the new arrangement. Management of the Company
expects that adoption of EITF Issue 98-14 will result in a charge to interest
expense of approximately $470,000 in the second quarter of 1999 resulting from
the amended Holdings Loan Facilities agreements' reduced borrowing capacity.
YEAR 2000 COSTS
Many financial information and operational systems in use today may not be able
to interpret dates after December 31, 1999 because such systems allow only two
digits to indicate the year in a date. As a result, such systems are unable to
distinguish January 1, 2000 from January 1, 1900, which could have adverse
consequences on the operations of an entity and the integrity of information
processing. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a shut down in a
company's operations, a temporary inability to process transactions, send
invoices or engage in similar normal business activities. This potential problem
is referred to as the "Year 2000" or "Y2K" issue.
State of readiness. The Company has undertaken various initiatives to evaluate
the Year 2000 readiness of the products and services sold by the Company
("Products"), the information technology systems used in the Company's
operations ("IT Systems"), its non-IT systems, such as power to its facilities,
HVAC systems, building security, voice mail and other systems, as well as the
readiness of its customers and suppliers. The Company has identified eight Year
2000 target areas that cover the entire scope of the Company's business
31 (Continued)
and has internally established teams committed to completing an 8-step
Compliance Validation Process ("CVP") for each target area. Each team is
expected to fully complete this process on or before September 1, 1999. The
table below identifies the Company's target areas as well as the 8-step CVP with
its expected timeline. Team activity is currently focused towards the process of
completing Phase 2.
----------------------------------------------- --------------------------------------------------------------------
Year 2000 Target Areas Compliance Validation Process
----------------------------------------------- --------------------------------------------------------------------
1. Business Computer Systems PHASE 1
2. Technical Infrastructure 1. Team Formation Completed 1st quarter 1997
3. End-User Computing 2. Inventory Assessment Completed 4th quarter 1998
4. Switching and Head-end Equipment 3. Compliance Assessment Completed 4th quarter 1998
5. Logistics 4. Risk Assessment Completed 4th quarter 1998
6. Facilities
7. Customers ------------------------------- ------------------------------------
8. Suppliers/Key Service Providers PHASE 2
5. Resolution/Remediation Expected completion 2nd quarter 1999
6. Validation Expected completion 3rd quarter 1999
7. Contingency Plan Expected completion 3rd quarter 1999
8. Sign-Off Acceptance Expected completion 4th quarter 1999
----------------------------------------------- ------------------------------- ------------------------------------
In 1997, the Company established a corporate-wide Year 2000 task force to
address Y2K issues. This effort is comprehensive and encompasses software,
hardware, electronic data interchange, networks, PC's, facilities, embedded
chips, century certification, supplier and customer readiness, contingency
planning, and domestic and international operations. The Company is currently on
schedule and is more than 75% complete as of March 31, 1999. The Company has
tested, replaced or upgraded most of its critical business applications and
systems and has begun the century testing phase for these critical technology
systems. The target date to repair or replace the remaining critical business
information systems is June 30, 1999. The Company is assessing its telephone and
cable systems and equipment and the target date to complete equipment and
facilities efforts is also June 30, 1999. The Company has prioritized its
third-party relationships as critical, severe or sustainable, has completed the
assessment phase for third parties, has requested a Y2K contract warranty in
many new key contracts and is developing contingency plans for critical third
parties, including key customers, suppliers and other service providers. An
assessment of its key customers showed that no significant impact to the Company
is expected due to customer Y2K problems. The Company continues to evaluate
other telecommunication companies which purchase the Company's services.
With respect to the Company's relationships with third parties, the Company
relies both domestically and internationally upon various vendors, governmental
agencies, utility companies, telecommunications service companies, delivery
service companies and other service providers. Although these service providers
are outside the Company's control, the Company has mailed letters to those with
whom it believes its relationships are material and has verbally communicated
with some of its strategic customers to determine the extent to which interfaces
with such entities are vulnerable to Year 2000 issues and whether products and
services purchased from or by such entities are Year 2000 ready.
Over 400 companies have been contacted directly by mail, by telephone, through
on-site visits or through inquiry of their Y2K Internet web sites to determine
their state of readiness. Responses vary from confirmation that the supply of
products or services provided to the Company will continue without
32 (Continued)
interruption or delay through the year 2000, to providing their plans for making
their products or service delivery systems Y2K compliant. The Company is
currently evaluating the sufficiency of the responses received from these third
parties. The Company intends to complete follow-up activities, including but not
limited to site surveys, phone surveys and mailings, with significant vendors
and service providers as part of the Phase 2 validation.
Costs to address year 2000 issues. Costs related to the Y2K issue are expensed
as incurred and are funded through the Company's operating cash flows and its
credit agreements. Through March 31, 1999, the Company has expensed incremental
remediation costs totaling $1.4 million, with remaining incremental remediation
costs estimated at approximately $2.6 million. Management must balance the
requirements for funding discretionary capital expenditures with required year
2000 efforts given its limited resources. The Company has not deferred any
critical information technology projects because of its Year 2000 program
efforts, which are being addressed primarily through a dedicated team within the
Company's information technology group.
Time and cost estimates are based on currently available information and could
be affected by the ability to correct all relevant computer codes and equipment,
and the Y2K readiness of the Company's business partners, among other factors.
At this time, the Company does not possess information necessary to estimate the
potential financial impact of Year 2000 compliance issues relating to its
vendors, customers and other third parties.
Risk of year 2000 issues. If necessary modifications and conversions by the
Company are not made on a timely basis, or if key third parties are not Y2K
ready, Y2K problems could have a material adverse effect on the Company's
financial condition, results of operations and liquidity. However, the Company
is focusing on identifying and addressing all aspects of its operations that may
be affected by the Year 2000 issue and is addressing the most critical
applications first.
Although the Company considers them unlikely, the Company believes that the
following several situations, not in any particular order, make up the Company's
most reasonably likely worst case Year 2000 scenarios:
- Disruption of Electrical Power Supplies Resulting from Extended
Regional Power Failure(s). The Company's major switching and
information systems are protected by emergency standby electrical
generators in the event of short-term power outages. If electrical
supplies from regional electric utilities are disrupted for longer
periods of time, the Company may be required to power-down its
electronic switching, head-end and computer equipment. The Company is
closely monitoring electrical utilities that provide service to the
Company for their Year 2000 readiness. Based on their progress reports
and completion of assessments, the Company believes that there will be
no significant impact on its operations in the major communities served
by the Company. Many of the electrical companies serving smaller rural
communities employ equipment that is manual or controlled by non
date-effecting equipment, however they may experience outages if they
do not receive fuel from their suppliers.
- Disruption of a Significant Customer's Ability to Accept Products or
Pay Invoices. The Company's significant customers are large,
well-informed customers, mostly in the telecommunications and oil and
gas industries, who are disclosing information to their vendors that
indicates they are well along the path toward Year 2000 compliance.
These customers have demonstrated their awareness of the Year 2000
issue by issuing requirements of their suppliers and indicating the
stages of identification and remediation which they consider adequate
for progressive calendar quarters leading up to the century mark. The
Company's significant customers, moreover, are substantial companies
that the Company believes would be able to make adjustments in their
processes as required to cause timely payment of invoices.
- Disruption of Supplies and Materials. In early 1998 the Company began
an ongoing process of surveying its vendors with regard to their Year
2000 readiness and is now in the process of assessing and cataloging
33 (Continued)
their responses to the survey. The Company is hopeful of receiving
adequate responses from remaining critical vendors and many
non-critical vendors by June 30, 1999. The Company expects to work with
vendors that show a need for assistance or that provide inadequate
responses, and in many cases expects that survey results will be
refined significantly by such work. Where ultimate survey results show
that the need arises, the Company will arrange for back-up vendors
before the changeover date. Supplies and materials necessary for
invoicing and other functions will be acquired in bulk prior to
December 31, 1999 to provide an adequate inventory to bridge up to
three months of vendor supply chain disruptions.
- Disruption of the Company's Administrative and Billing IT Systems. The
Company has completed an upgrade of its current financial software
systems to state-of-the-art systems and such process has required Year
2000 compliance in the various invitations for proposals. Year 2000
testing is occurring as upgrades proceed and, in addition, will occur
after all upgrades are completed at the end of the first quarter of
1999. The Company's billing and information systems continue to be
assessed and remediated. System processes have been prioritized so that
critical date-sensitive systems and functionality are remediated first.
Non-critical systems and functionality are remediated following
critical systems. The Company's efforts are proceeding on-target and
on-budget. Accordingly, the Company believes that, after assessment and
remediation, if any disruptions do occur, such will be dealt with
promptly and will be no more severe with respect to correction or
impact than would be an unexpected billing or information system error.
- Disruption of the Company's Non-IT Systems. The Company continues to
conduct a comprehensive assessment of all non-IT systems, including
among other things its switching and head-end systems and operations,
with respect to both embedded processors and obvious computer control.
For some systems, upgrades are already scheduled and it is expected
that the Phase 1 assessments will highlight by the end of the second
quarter of 1999 any further remediation needs. Considering the nature
of the equipment and systems involved, the Company expects that the
timing of assessment to be such that it will be able to complete any
remediation efforts on a reasonably short schedule, and in any case
before arrival of the Year 2000. The Company also believes that, after
such assessment and remediation, if any disruptions do occur, such will
be dealt with promptly and will be no more severe with respect to
correction or impact than would be an unexpected breakdown of
well-maintained equipment.
- De-Listing of Company as a Vendor to Certain Customers. Several of the
Company's principal customers have required updated reports in the form
of answers to extensive multiple-choice surveys on the Company's Year
2000 compliance efforts. According to these customers, failure to reply
to the readiness survey would have led to de-listing as a service
supplier at the present time, resulting in possible disqualification to
bid on procurements requiring service delivery in the future. The
Company has responded to these reports on a timely basis. The Company
has not been disqualified as a supplier to any customers. Several
significant customers have scheduled monitoring meetings during 1999.
Contingency plans. The Company is in the process of developing specific
contingency plans for potential Year 2000 disruptions. The aforementioned 8-step
Compliance Validation Process includes contingency planning by each team and
such plans, as developed, will be carefully reviewed by the Company. The Company
is developing contingency plans for its most critical areas, but details of such
plans will depend on the Company's final assessment of the problem as well as
the evaluation and success of its remediation efforts. Future disclosures will
include contingency plans as they become available.
ALASKA ECONOMY
The Company offers telecommunication and video services to customers primarily
throughout Alaska. As a result of this geographic concentration, the Company's
growth and operations depend upon economic conditions in Alaska. The economy of
Alaska is dependent upon the natural resource industries, and in particular oil
production, as well as tourism, government, and United States military spending.
Any deterioration in these markets could have an adverse impact on the Company.
Oil revenues over the past
34 (Continued)
several years have contributed in excess of 75% of the revenues from all
segments of the Alaska economy and are expected to account for 73% in 1999.
The volume of oil transported by the TransAlaska Oil Pipeline System over the
past 20 years has been as high as 2.0 million barrels per day in 1988. Over the
past several years, it has begun to decline. Market prices for North Slope oil
declined to below $10 per barrel in 1998, well below the average price per
barrel used by the State of Alaska to budget its oil related revenues. Oil
companies and service providers have announced cost cutting measures to offset a
portion of the declining revenues. Oil company and related oil field service
company layoffs reportedly will result in a reduction of oil industry jobs by at
least 39 percent in 1999.
The effects of low oil prices will impact the state of Alaska's economy, and is
expected to particularly hurt state and local government and oil service
companies. As much as half of the drilling fleet that worked on the slope in
1998 could be idle during 1999. Oil field service and drilling contractors cut
operating costs to adjust for decreasing production and exploration. The
Company, as an outsourcing services provider to the oil industry, reduced its
outsourcing work force by 8 employees in February 1999.
Since oil revenues to the state of Alaska are expected to fall significantly
short of budgeted revenues, (estimated at $1.04 billion for the coming budget
year), the Governor of the state of Alaska has announced his intention to
implement cost-cutting and revenue enhancing measures. The State of Alaska
maintains surplus accounts that are intended to fund budgetary shortfalls and
would be expected to fund a portion of the revenue shortfall.
BP Amoco announced in April 1999 its intention to purchase ARCO for $26.8
billion. BP Amoco and ARCO together reportedly hold approximately 75 percent of
the ownership of the Alaska North Slope oil fields and in the company that
operates the Trans-Alaska Pipeline System. Alaska law stipulates that no single
company can hold drilling leases to more than 500,000 onshore state-owned acres.
The BP Amoco-ARCO combination would control about 860,000 acres, however the
companies have reportedly said they will give up 360,000 acres to comply with
Alaska laws. Realignment of operations following the acquisition reportedly will
result in the layoff of 400 positions in Alaska.
No assurance can be given that oil companies doing business in Alaska will be
successful in discovering new fields or further developing existing fields which
are economic to develop and produce oil with access to the pipeline or other
means of transport to market, even with the reduced level of royalties. The
Company is not able to predict the effect of declines in the price of North
Slope oil or the acquisition of ARCO by BP Amoco on Alaska's economy or on the
Company.
35 (Continued)
SEASONALITY
Long-distance revenues have historically been highest in the summer months as a
result of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers tend to watch more television, and spend more
time at home, during these months. The Company's local access services revenues
are not expected to exhibit significant seasonality. The Company's Internet
access services are expected to reflect seasonality trends similar to the cable
television segment. The Company's ability to implement construction projects is
reduced during the winter months because of cold temperatures, snow and short
daylight hours.
INFLATION
The Company does not believe that inflation has a significant effect on its
operations.
PART I.
ITEM 3. QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
The Company's Senior Holdings Loan carries interest rate risk. Amounts borrowed
under this Agreement bear interest at either Libor plus 1.0% to 2.5%, depending
on the leverage ratio of Holdings and certain of its subsidiaries, or at the
greater of the prime rate or the federal funds effective rate (as defined) plus
0.05%, in each case plus an additional 0.0% to 1.375%, depending on the leverage
ratio of Holdings and certain of its subsidiaries. Should the Libor rate, the
lenders' base rate or the leverage ratios change, the Company's interest expense
will increase or decrease accordingly. As of March 31, 1999, the Company had
borrowed $106.7 million subject to interest rate risk. On this amount, a 1%
increase in the interest rate would cost the Company $1,067,000 in additional
gross interest cost on an annualized basis.
The Company's Fiber Facility carries interest rate risk. Amounts borrowed under
this Agreement bear interest at either Libor plus 3.0%, or at the Company's
choice, the lender's prime rate plus 1.75%. The interest rate will decline to
Libor plus 2.5%-2.75%, or at the Company's choice, the lender's prime rate plus
1.25%-1.5% after the project completion date and when the loan balance is
$60,000,000 or less. Should the Libor rate, the lendors' base rate or the
leverage ratios change, the Company's interest expense will increase or decrease
accordingly. As of March 31, 1999, the Company had borrowed $66.1 million
subject to interest rate risk. On this amount, a 1% increase in the interest
rate would cost the Company $661,000 in additional gross interest cost on an
annualized basis.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding pending legal proceedings to which the Company
is a party is included in Note 5 of Notes to Interim Condensed
Consolidated Financial Statements and is incorporated herein by
reference.
36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10.72 - Consent and First Amendment to Credit
Agreements dated November 14, 1997 *
Exhibit 10.73 - Second Amendment to $200,000,000 Amended and
Restated Credit Agreement *
Exhibit 10.74 - Second Amendment to $50,000,000 Amended and
Restated Credit Agreement *
Exhibit 10.75 - Third Amendment to $200,000,000 Amended and
Restated Credit Agreement *
Exhibit 10.76 - Third Amendment to $50,000,000 Amended and
Restated Credit Agreement *
Exhibit 10.77 - General Communication, Inc. Preferred Stock
Purchase Agreement *
Exhibit 10.78 - Revised Qualified Employee Stock Purchase Plan
of General Communication, Inc. *
Exhibit 10.79 - Statement of Stock Designation *
Exhibit 27 - Financial Data Schedule *
(b) Reports on Form 8-K filed during the quarter ended March 31,
1999 - None
---------------------
* Filed herewith.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
Signature Title Date
- -------------------------------------- -------------------------------------------- ------------------
/s/ President and Director May 14, 1999
- -------------------------------------- (Principal Executive Officer) ------------------
Ronald A. Duncan
/s/ Senior Vice President, Chief Financial May 14, 1999
- -------------------------------------- Officer, Secretary and Treasurer ------------------
John M. Lowber (Principal Financial Officer)
/s/ Vice President, Chief Accounting May 14, 1999
- -------------------------------------- Officer ------------------
Alfred J. Walker (Principal Accounting Officer)
38